Universal Foods issued 10% bonds, dated January 1, with a face amount of $230 mi

Question

Universal Foods issued 10% bonds, dated January 1, with a face amount of $230 million on January 1, 2016. The bonds mature on December 31, 2035 (20 years). The market rate of interest for similar issues was 12%. Interest is paid semiannually on June 30 and December 31. Universal uses the straight-line method. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the price of the bonds at January 1, 2016. (Enter your answer in whole dollars.) Price of the bonds 2. to 4. Prepare the journal entry to record their issuance by Universal Foods on January 1, 2016, interest on June 30, 2016 and interest on December 31, 2023. (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list 1 Record the issuance of the bond on January 1, 2016. 2 Record the interest on June 30, 2016. 3 Record the interest on December 31, 2023. Credit Note : = journal entry has been entered Record entry Clear entry View general journal

Explanation / Answer

1) Market interest rate = 12%    Market interest rate for a semiannual period = 12% / 2 = 6%    r = 0.06 (per semiannual period),       n = 40 (semiannual periods) Present value of principal    = $230 million x Present value factor for a single payment (6%, 40 periods)    = $230 million x 0.09722    = $22.3611 million Interest payment each semiannual period    = $230 million x 5%    = $11.5 million    (Coupon rate for a semiannual period = 10% / 2 = 5%.) Present value of interest payments    = Interest payment each semiannual period           x Present value factor for an ordinary annuity (6%, 40 periods)    = ($230 million x 5%) x 15.0463    = $173.03245 million Price of bonds    = Present value of principal + Present value of interest payments    = $22.3611 + $173.03245    = $195.39355 million 2) JOURNAL (in millions) (in millions) Date Account Head & Description Debit Amount Credit Amount Jan 1, 2016 Cash $230 10% bonds $195.39355 Discount on issue of bonds $34.60645 (to record the issue of bonds) Jun 30, 2016 Interest expense ($230*10%*6/12) $11.5 million Discount on issue of bonds ($34.60645/40) $0.86516125 million Cash $12.36516125 million (to record the first interest payments) Dec 31, 2016 Interest expense ($230*10%*6/12) $11.5 million Discount on issue of bonds ($34.60645/40) $0.86516125 million Cash $12.36516125 million (to record the second interest payments)

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